So far WP7 has been a sales dud, but if Microsoft pours enough money into the well, something might come out

You win some, you lose some they say. Microsoft Corp. (MSFT), a company known for its history of "winning" in the OS and gaming market, has begrudgingly been forced to accept losses in the internet and smartphone sectors. The company recently announced that its Bing search engine, which lost some of its small market share in 2011, may never turn a profit.

I. From 23 Percent Down to 2 Percent: The Sordid WP7 Development Cycle

It's a similar story for Windows Phone 7. Next Friday, the platform will celebrate its first year on the market (or a year since the EU product launch -- NA sales began in November). But sales have languished and the public still remains largely unaware and uiniterested in buying a Microsoft smartphone.

Back in 2004, Microsoft had planned a major rewrite of its Windows Mobile operating system which it dubbed "Photon". Microsoft at the time somewhat recognized that mobile devices were transitioning from business tools to entertainment devices. And owning almost a quarter of global smartphone sales, it was well-positioned to drive the future.

Windows Mobile once had almost a quarter of the global smartphone market, but Microsoft let its strong position slip away thanks to slow OS development. [TechViva]

But Photon languished in development and the product was scrapped. By 2007 Finland's Nokia, Oyj. (HEL:NOK1V) and America's Apple, Inc. (AAPL) had launched slick touch-screen entertainment-minded smartphones. Suddenly Windows Mobile looked very dated.

Microsoft vowed to act. In 2008 it shook up its mobile group and activated what would become the Windows Phone unit. But again, development was slow.

At the same time in 2008 Google Inc.'s (GOOG) rival smartphone bid started to heat up. In late 2008 and early 2009 rival Android hardware had started to trickle onto the market. By 2010, it was hitting its stride, showing off superior customizability to Apple's much beloved iPhone, and showing off a broader selection, which included handsets with faster processors and superior cell modems to the iPhone.

The war was shaping up to be Apple versus Google, with Microsoft looking increasingly like an afterthought. Microsoft's new mobile team had pushed out a stopgap release (Windows Mobile 6.5) in 2009, but it still had no modern smartphone product.

Over the course of 2010 it finally inched closer to the market. And what it would finally launch on October 21 was quite remarkable.

II. Microsoft Delivers a Slick Product -- But No One Notices

Windows Phone 7 debuted in remarkable form showing an interface which -- to many's surprise -- did not imitate Google or Apple's operating systems. Rather it was a slick animated tile driven Metro UI that presented dense information to the user in a colorful, inviting format.

Despite Microsoft's imaginative approach, Windows Phone 7 languished in sales. A big part of the problem was so-called "channel incentives". At most American carriers sales staff get undisclosed commissions (bonuses) -- often directly from the device maker. Device makers in turn get handed money by platform makers, to push certain operating systems.

To that end, Microsoft budgeted $400M USD to try to convince companies like Samsung Electronics (SEO 005930), LG Electronics (SEO:066570), and HTC Corp. (SEO:066570) to push incentives for sales people for Windows Phone 7 (this money was largely billed by the media as "advertising" funding, though it's not necessarily advertising in a traditional sense).

But according to early reports, Microsoft didn't end up giving out much cash.

James Choi, marketing strategy and planning team director for LG Electronics toldPocket-Lint, "From an industry perspective we had a high expectation, but from a consumer point of view the visibility is less than we expected."

Typically smartphone sales are driven by three factors:

In-store salespeople commissions

Internet/TV ads

Word-of-mouth consumer reactions

Microsoft had no real word-of-mouth as it was launching a completely new platform. And some of its partners indicated that it was being too stingy when it came to funding commissions. As a result, customers came into American phone carriers' stores and heard about all the great Android cell phones and the iPhone (which salespeople would receive incentives to sell), but Windows Phone 7 was left out of the disussion.

Sales people didn't try to push Windows Phones as hard as they got less commissions on them. Thus many buyers never learned about Microsoft's intriguing product. [AP Photo]

In short, Microsoft had a product that all its partners -- and many in the media -- seemed to agree was terrific, but nobody knew about it.

III. Microsoft is Putting Most of its Eggs in One Basket -- Nokia's to be Precise

So what's the future look like for Microsoft? Well, last month a major OS update -- Mango -- rolled out. According to market researcher Horace Dediu at asymco, there are now 27 Windows Phone 7 handsets and 11 Windows Phone 7.5 (Mango) handsets on the market. That sounds like a lot, but sales haven't shown much gains -- yet.

That's partially because of the one major question mark for Microsoft that has gone unmentioned -- Nokia.

In February, Nokia announced that it would be dumping Symbian and adopting Windows Phone 7 globally as its smartphone OS. In return Microsoft promised it over a billion dollars, reportedly, to drive sales commissions and advertising for the phones.

Nokia, at the time was the world's biggest phonemaker and Microsoft was languishing with less that 3 percent market share in the smartphone market -- a fall from once holding almost a quarter of the market in 2004.

That said Microsoft is coming to the game very late -- as is Nokia. The pair represents two of the most opportunely positioned players to find success in the smart phone market, yet they've also been too of the most sluggish in terms of releasing hardware and software in a timely fashion.

Windows Phone's next year should determine whether Nokia and Microsoft are a dream team or a nightmare. [Reuters]

Between the positives (promotional cash) and negatives (sluggish pace) it's hard to tell if Microsoft and Nokia is a dream team or a nightmare. Over the next season we should find out.

Analysts like Mr. Dediu argue that Microsoft should see at least some marketshare. But it's plans of bumping Apple to second place are met with some skepticism, given its performance thus far.

Writes Mr. Dediu:

[D]ependence on a complex value network means that products do not reach users quickly enough and when they do the marketing message is weak, even when backed by large budgets. The real problem with Microsoft’s approach is that it’s neither viral like Android (because it has a price and a contract associated with it) nor is it focused and agile like Apple’s. It seems to suffer from the worst aspects of modularity (market lag) without benefiting from the control over the ecosystem and end user experience that differentiates it.

Microsoft will muddle through but the 20% share that it says is "conservative" seems anything but.

In the end, that seems like a fair summary of the platform's ongoing struggles.

That said, Microsoft can at least sleep soundly at night as it's fast approaching its goal of receiving royalties on every Android smartphone sold [1][2]. That could help it break even, even as it gives away wads of cash to try to promote WP7.

I don't think that Android users spend that much on apps, but maybe have enough that they like, and feel attached to.

The main problem, as I see it (in the UK at least), is that even if you want a winMo phone (as I do) it's actually rather difficult to find someone to sell you one.

We have 4 major carries here, T-Mobile (who I'm with currently), Vodafone, Orange and O2. T-Mobile do not sell a single winMo phone, Vodafone sell one old one and O2 have a couple, but non of these 3 have any Mango phones in the "coming soon" section. Orange sell a couple of WP7 phones at least, and appear to be the only major player planning on selling a Mango phone directly with the HTC Radar. Sadly, this is a Mango version of a second rate, 6 month old Android phone*.

The HTC Titan (the only interesting Mango phone due to be released over here) will be available (along with the Radar) from third parties like carphonewarehouse, and phones4u, but that's it.

Basically, MS don't seem to be trying, as far as I can see. Mango is surely a big thing for them, yet I've not seen a single advertisement on TV about it, even though it's due to be released at the weekend. It's almost like they've given up before they've really got started.

* Yes, I know, spec's aren't everything as WP7(.5) doesn't need the raw power that Android might, but still, it doesn't look good.

Have you checked which of the phones they offer are eligible for the upgrade? As far as I know, most of the existing phones will get it. And its amazing, as fast as my Arrive was before mango, its faster yet now with it. And Bing vision rocks, the voice controls rock, basically it rocks.

I suppose I could check, but there are only 3 models of WP7 phone available at the moment, and of them the HD7 is probably the only one that is worth checking out.

You see, I've had a HTC Desire for the last 18 months, and I know that spec's aren't everything (as stated above) but I am loathed to pay money for hardware that is worse than that, especially as I will be tied into at least an 18 month contract as that's the way things are now.

Even though I might accept the anecdotal reports here of how good WP7 is on old (in Android terms) hardware, how many members off the general public will?

How many providers offer a HD7 in the UK directly? 1.

Maybe things are better in the US, but over here in the UK, WP7 might as well not exist, when there are tens of Android hand sets at all price points, a few iOS handsets and then 1 or 2 rather uninspiring WP7 handsets out there.